“Open Banking”—the mere thought conjures ideas of a free-for-all in retail banking, where the financial institution (FI) that worked so hard to acquire the consumer’s business will see it disappear—or worse yet, where the consumer isn’t in charge of their banking information.
Today’s banking world continues to become more complex. Like it or not, we live in a constant world of banking. An endless stream of debits and credits supported by financial products make our commerce-based lives tick. To keep the financial flywheel going, we as consumers maintain relationships with multiple financial providers: some banks, and also some non-banks. Digital payments and “just in time” data around financial decisions are becoming the norm. Yet given the legacy of our banking systems in most countries around the world, supporting this in consumer-centric, meaningful ways is overwhelmingly difficult.
In my opinion, Open Banking is a savior—at least in the sense of finally bringing together the vast amounts of financial data, information, accounts and ultimately insights that a consumer can use to navigate their financial lives on a daily basis.
The relatively new (at least in some geographic regions of the world) concept of Open Banking is misunderstood. It was, in fact, developed to support the consumer, and to liberate consumers to make appropriate financial decisions at the right time, at the right place and for the right need. Payments has certainly been a driver, maybe even the accelerator for Open Banking, but it isn’t going to be the real star of the show. Open Banking goes beyond payments to connect the consumer’s entire ecosystem of finances.
What is Open Banking?
In a nutshell, Open Banking is a system that provides access to a network of FIs and products through the use of standard, published APIs. The Open Banking Standard
defines how financial data should be created, shared and accessed. By relying on networks instead of our legacy of centralization, Open Banking helps financial-services consumers securely share their financial data with other FIs. Open Banking regulations require banks to publish accurate and unbiased information. The European Payment Services Directive 2 (PSD2)
is probably the best known example of where the industry is going, but other countries such as the UK, Australia, Singapore, Mexico and Canada have embarked on Open Banking journeys.
The result? Where adopted, it can pressure or even force large, established banks to be more competitive with smaller and newer banks, theoretically resulting in lower costs, better technology and better customer service.
Think about the painful process of switching bank accounts between FIs or changing a payment vehicle for things like a gym membership. In a world where shared, secure, consumer-centric financial data and access is commonplace, the consumer can freely make more informed decisions and navigate the financial tools they need, at their time of need, without the laborious efforts of chasing the paper trail and administration typical in the legacy way of doing things.
How Bankers Benefit from Open Banking
On a personal note, I have firsthand experience with how Open Banking could have helped me. As a Financial Advisor and Small Business Banking Manager for a large Canadian Bank in the past, the ability to accurately understand my clients’ full financial landscape would have helped me provide even better advice on their financial decisions, without having to force them to do the legwork and find the information needed to fill out the complete picture. That doesn’t mean I would’ve “scooped” business from other providers—it’s just that my analysis and advice could’ve been focused on the consumer’s full picture, not just their interactions with my institution.
My second example is even more personal. As the executor to my parent’s estate, the painful process of identifying, reporting on, consolidating and liquidating financial assets and vehicles was not only time consuming and tedious, it was emotionally draining. Once again, in the world of Open Banking this would become infinitely easier to navigate—and resolve.
Aside from the consumer benefits, for many FIs, opening up the kimono and exposing yourself is a scary proposition. Open Banking has and will undoubtedly continue to increase competition, requiring established banks to do things in new ways that they are not currently set up to handle—and spend money to do it.
Goliath FinTechs, such as Amazon and Google, are frequently the exemplar benchmarks of the new economy. They have reached massive global scale through new business models enabled by software and data. Globally there’s good traction to cooperate and compete in the Open Banking space. However, if we look at the American landscape, FIs are not required to open their customer and transaction data up to third-party providers—yet. However, several banks and providers are already jumping into the ‘open’ arena. Looking at Open Banking as an opportunity might be a competitive tactic for early adopters as they provide open exchange environments that expose APIs publically. Down the road, the majority of U.S. banks and credit unions could be facing the prospect of numerous FIs operating as Amazon-like platforms for cutting edge financial products and services; look at the recent announcement from Google
Not to fear, though. There’s a key silver lining: embrace the concept, do it right and you’ll be positioned to strengthen consumer relationships and retention by better helping consumers to manage their finances proactively and in the moment, instead of simply facilitating transactions.
My parting thought: if you haven’t already thought about this in your medium or long term strategy, now is the time to dig in and prepare for the inevitable!
Our software experts can help you navigate Open Banking. Let’s start a conversation today.